As more companies are relying on globalization to penetrate different markets, there has been a growing concern for double taxation on foreign revenues. U.S. companies would normally pay federal tax on their worldwide profits and use their foreign taxes as a credit on their return. Although, this only applies to compulsory taxes which means it is required under foreign law that a company must pay taxes to a given country. So if you are running a business in Germany and you make $100 million for the year and pay $25 million in German taxes, you would only $10 million to the U.S. government. This is because the U.S. has a 35% corporate tax rate and as a result, $35 million – $25 million = $10 million.
If your company is paying voluntary taxes due to adjustments like transfer pricing, you may have to pay taxes in Germany and the U.S. So let’s say your company actually owes $35 million in German taxes because of transfer pricing, then the U.S. could deny the $10 million credit. This is because the company is technically voluntarily paying at a higher rate. As a result, your company would pay $45 million in taxes total. Unfortunately, not all foreign taxes are creditable in the eyes of the IRS. The IRS requires a company exhaust all “effective and practical remedies to reduce the [company’s] liability for foreign tax.”
This exhaustion requirement means taxpayers must seek U.S. competent authority assistance to resolve disputes about double taxation. Taxpayers can even seek competent authorities for disputes involving two foreign countries. As long as the taxpayer fights the double taxation, there is a better chance he/she will not have to pay taxes twice. By seeking counsel for your tax issues, there is a much larger possibility your tax debt will be resolved.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.